Follow Mises Institute

Books / Digital Text

6. Monetary Calculation and the "Economic in the Narrower Sense"

All action aims at results and takes on meaning only in relation to results. The preferring and setting aside that are involved in action take as their standard the importance of the anticipated result for the well-being of the actor. Whatever directly serves well-being is, without difficulty, given a rank in accordance with its importance, and this provides the rank order in which the goals of action stand at any given moment. How far it is possible to bring the relatively remote prerequisites of well-being into this rank order without resorting to more complicated processes of thought depends on the intelligence of the individual. It is certain, however, that even for the most gifted person the difficulties of weighing means and ends become insurmountable as soon as one goes beyond the simplest processes of production involving only a short period of time and few intermediary steps. Capitalistic production—in Böhm-Bawerk's sense, not in that of the Marxists—requires above all else the tool of economic calculation, through which expenditures of goods and of labor of different kinds become comparable. Those who act must be capable of recognizing which path leads to the goal aimed at with the least expenditure of means. This is the function of monetary calculation.

Money—that is, the generally used medium of exchange—thus becomes an indispensable mental prerequisite of any action that undertakes to conduct relatively long-range processes of production. Without the aid of monetary calculation, bookkeeping, and the computation of profit and loss in terms of money, technology would have had to confine itself to the simplest, and therefore the least productive, methods. If today economic calculation were again to disappear from production—as the result, for example, of the attainment of full socialization—then the whole structure of capitalistic production would be transformed within the shortest time into a desolate chaos, from which there could be no other way out than reversion to the economic condition of the most primitive cultures. Inasmuch as money prices of the means of production can be determined only in a social order in which they are privately owned, the proof of the impracticability of socialism necessarily follows.

From the standpoint of both politics arid history, this proof is certainly the most important discovery made by economic theory. Its practical significance can scarcely be overestimated. It alone gives us the basis for pronouncing a final political judgment on all kinds of socialism, communism, and planned economies; and it alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society. Here we need not go into this further. We must consider tire problem of monetary calculation in another respect, namely, in its importance for the separation of action "economic in the narrower sense" from other action.

The characteristic feature of the mental tool provided by monetary calculation is responsible for the fact that the sphere in which it is employed appears to its as a special province within the wider domain of all action. In everyday, popular usage the sphere of the economic extends as far as monetary calculations are possible. Whatever goes beyond this is called the noneconomic sphere. We cannot acquiesce in this usage when it treats economic and noneconomic action as heterogeneous. We have seen that such a separation is misleading. However, the very fact that we see in economic calculation in terms of money the most important and, indeed, the indispensable mental tool of long-range production makes a terminological separation between these two spheres appear expedient to us. In the light of the comments above, we must reject the terms "economic" and "noneconomic" or "uneconomic," but we can accept the terms "economic in the narrower sense" and "economic in the broader sense," provided one does not want to interpret them as indicating a difference in the scope of rational and economic action.

(We may remark incidentally that monetary calculation is no more a "function" of money than astronomical navigation is a "function" of the stars.)

Economic calculation is either the calculation of future possibilities as the basis for the decisions that guide action, or the subsequent ascertainment of the results, i.e., the computation of profit and loss. In no respect can it be called "perfect." One of the tasks of the theory of indirect exchange (the theory of money and credit) consists precisely In showing the imperfection—or, more correctly, the limits—of what this method is capable of. Nevertheless, it is the only method available to a society based on the division of labor when it wants to compare the input and the output of its production processes. All attempts on the part of the apologists of socialism to concoct a scheme for a "socialist economic calculation" must, therefore, necessarily fail.